We’ve written quite a bit about NEST and auto-enrolment recently. It’s the pension monster coming over the hill for UK employers.

In this post we wanted to share with you some work that we had been doing with a prospective client of ours. After all why keep all the good stuff to ourselves! We’re spending quite a bit of our time looking at the financial impact of the new pension rules and helping employers understand the impact. To do this we really need to be talking to the HR and Finance Director as the new rules will affect both areas – but in radically different ways. In this post we are going to look at our discussions with the Finance Director of one of our prospective clients. It involves the back of an envelope calculation in true pension consultancy fashion!

EHF Manufacturing

EHF Manufacturing is a successful company in Leicester that’s involved in manufacturing – seems to be a rarity these days. The owners manage the business. We deal a lot with owners and managers. It’s a sector the market that we really enjoy working in. There’s nothing to beat giving advice to the people who actually own the business.

Where are we starting from?

EHF Manufacturing employs 116 employees. There are 16 employees in Management and Admin and 100 employees in manufacturing and sales. The total payroll shown in the accounts is £2,100,000. Crudely that gives an average salary of £17,600 give or take.

The existing pension cost is £40,000 per annum. This works out at less than 2% of payroll. It all points towards a really low take up of pension membership. Not good as far as the new rules are concerned. With average salaries of £17,600 per annum these are exactly the section of the UK workforce that the government want to force to save through workplace pension schemes. So far so good – unless you write the cheques that is.

Where do we need to get to?

We’ve been talking to the Directors about some succession planning and they are looking at an exit in the next five to seven years. It’s a profitable company with a good market and should be relatively easy to sell.

We started to work out the cost impact of enrolling everybody in some sort of pension scheme. We assumed that about 80% of employees were not covered by any pension scheme. That’s 92 employees that EHF Manufacturing is going to have pay pension contributions for.

The good news for the Finance Director is that the staging date when EHF Manufacturing will have to start paying for the 92 employees is 1 June 2014. So they have some time to work out their NEST survival strategy.

The back of the brown envelope

If none of the 92 employees opt-out of NEST (or the EHF Manufacturing Scheme) it’ll cost the company as follows:

Time Period

Employer Contribution

Estimated Annual Cost

June 2014 – September 2016

1%

£11,040

October 2016 – September 2017

2%

£22,080

October 2017 onwards

3%

£33,120

Is it Exit stage right for the Directors?

You’ll see that this makes a dent on the profit margin of the business. Will this deter investors or purchasers? What about the management and admin time spent implementing and communicating this to employees? This will all take place slap bang in the middle of the time when the Directors are looking to exit from the business.

NEST Survival Strategy

Although these calculations were all done on the back of an envelope (an HMRC one at that!) with a set of accounts the solution will take more organisation. We’ll be talking to EHF Manufacturing about:

Their pay reviews over the next few years to build up a reserve for NEST.

Salary Exchange as a way of reducing the impact.

How the message needs to get out to employees.

Whether EHF Manufacturing use NEST or their own pension scheme

We’ll be looking to prepare a NEST Survival Strategy for EHF Manufacturing. We’ve shown you our homework we’d love to see yours. What are you doing about auto enrolment and factoring in the cost and upheaval into your business plans from 2012 onwards. We’d love to hear. Leave a comment and let us know what you’re thinking.

Remember – A dwarf on a giant’s shoulders sees the further of the two.

You know nothing ever seems to stay still in the world of pensions and benefits. As unbelievable as that may sound it’s not such a sleepy backwater anymore. The pace of change has really hotted up over the last ten years or so. We are seeing more and more case law and litigation which contests and re-defines large chunks of the status quo.

Not only is there UK legislation to think about but we also have the input from European Legislation on top. As if that wasn’t enough the plethora of Ombudsmen (I have no idea what the plural of Ombudsman is!) that we have in financial services and pensions also have their say. It’s for that reason that the old fashioned role of the “pension adviser” has had to change.

The Role of the Adviser

Historically for most smaller employers the adviser would “look after the pension scheme” which basically meant providing a basic level of admin support to the employer and signing up new joiners and dealing with leavers and retirements. If you were lucky they also looked after your group risk benefits and, even rarer still, your private medical care. That model gives you the employer no protection whatsoever. No one has the job of keeping the employer on the straight and narrow and making sure that you comply with all of the legislation and regulatory changes.

I’m glad to say that things are changing and there are a growing breed of advisers, like 44 Financial, who see their role as part of the team of business advisers who keep the employer on track. The old aspects of admin and basic advice and information for members are normally still in there as part of the service. It’s really that the principal role of the adviser has been redefined – and for the better.

The Daily Telegraph Case

What, you might ask, has this got to do with me? A recent article in Employee Benefits magazine highlighted the growing number of workplace disagreements. You can read the full article here. The interesting part for me was the Case Study that explained the judgement against the Daily Telegraph in the case of acworker who had been termed a “casual”. You can read the Case Study here.

Most (but by no means all!) of the benefit eligibility criteria that exist today have been amended to take out any discrimination on the grounds of age, gender or part-time employment. Your employees on fixed term contracts have also been accommodated after the UK introduced rehulations to comply with the European Directive. Chapter and verse on the regulations is here. However, the vast majority of employers that we have worked with still exclude employees who work on a “casual” basis. Admittedly it doesn’t affect every employer but you’d be surprised when you speak to employers how many temporary employees they have from time to time. If you have employees like this are they excluded from your benefits package if they don’t come under the Fixed Term Regulations?

This initial Employment Tribunal judgement in the Telegraph case ruled that the employee was entitled to the full package of benefits. It has now taken a further judgement from the Pensions Ombudsman to rule that access to the Pension Scheme should have been granted.

I can only guess that as time goes on and employees become more aware of the benefits provided and their entitlements that this type of case will increase.

Where do we go from here?

We’ll be talking to our clients about the use of temporary or infrequent employees to gain some idea of how widespread the issue is. It’s likely that we will recommend that some clients take advice from their employment law advisers.

It’s almost definite that we’ll recommend that changes are made in the long run to the eligibility criteria for various benefits.

That’s what we’ll be doing for our clients. What is your adviser doing for you? We’re currently offering, at our expense, an initial consultation for our Your Benefits Roadmap programme to the first 20 employers who subscribe. If you want to find out more and how this could not only save you money but keep you on the straight and narrow please contact us at talk2us@44financial.co.uk.

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